Are You Saving Too Much? Here Are 5 Savings Account Alternatives.

When it comes to financial management, saving money is always a good thing. But if you find you’re building up a significant balance in a traditional savings account, it may be time to speak to your bank about alternative investments. Here is why it’s important to master the nuances of saving.

When Enough Is Enough

Saving money is important to your financial well-being, and most experts advise building an emergency fund to cover at least three months of living expenses —although that amount is highly dependent on your family situation. Given that the average U.S. monthly income is just under $4,500 a month, it would be ideal to have about $20,000 in the bank to cover three months without income. But what happens when that balance reaches $25,000 or more?

By keeping high balances in a standard savings account, you could miss opportunities to grow your wealth and build a solid financial future. Since the Great Recession, interest rates on typical savings accounts have not surpassed 0.5%.

That’s because the interest rate of a traditional savings account is generally tied to the prime rate established by the Federal Reserve Bank. As the Fed raises rates, you’ll earn more interest on money held at your bank.

Yet despite recent Fed rate increases, we continue to experience a low interest rate environment. So, your high savings account balance may not be working for you the way it could if you invested surplus funds elsewhere. 

Alternatives to Traditional Savings Accounts

If you find yourself with a sizable amount of money in the bank, it may be time to consider how to make that money work a little harder. There are numerous saving options that can earn higher rates of return, but before we dive in, let’s discuss the merits of holding money in a traditional savings account with your bank.

First, balances held by your bank are insured by the federal government. That means that each tax ID is federally backed up to $250,000 by the FDIC. Investments do not have that type of FDIC insurance protection.

Second, money held in a savings account is always available for withdrawals. Keeping your emergency fund in a savings account allows you to access the money as needed.

However, once you exceed needed cash reserves, it may be time to seek higher-paying investment opportunities. These come in many forms and offer different advantages:

• High-Yield Savings Accounts: One simple way to make your money work harder is by moving funds to a high-yield savings account. This type of account offers all of the benefits of a traditional account, but can help you earn up to 12 times more money as compared to the national average on a typical savings account.
• Certificates of Deposit (CDs): CD accounts accrue interest at a fixed rate over a predetermined time period. Since you agree to hold the money in the account for a set amount of time, CDs pay higher rates than a traditional savings account.
• U.S. Treasury Bills (T-Bills): T-Bill are issued by the federal government and offer a short-term investment. T-Bills are purchased at a discount and redeemed at maturity for face value.
• Invest in Your Retirement: If you find you have excess funds in savings, it may be time to give your retirement account a boost. In 2023, individuals under the age of 50 can invest $6,500 into a traditional or Roth IRA. Those 50 and older can contribute $7,500. Over time, these accounts can offer higher growth potential than CDs or savings accounts.
• Mutual Funds: Mutual funds allow you to invest in securities, such as stocks, bonds or short-term debt without the stress of learning the intricacies of each investment type. Your money is managed by a professional fund manager who works on your behalf to try to achieve the best results.

While there are many opportunities for saving and investing, understanding the best place to put your money can be complicated. Strategies should be based on your individual situation and goals.

To make the best choices for you, be sure to speak to a financial advisor or wealth management professional. These experienced individuals will help guide you toward the best options for saving and even help with the necessary transactions.